Special Report: Well known oil and gas analyst John Young believes Warrego Energy (ASX: WGO) could be worth more than six times its current value should its imminent Perth Basin drilling program prove successful.
Warrego’s flagship asset is a 50 per cent interest in block EP469 in the Perth Basin neighbouring the Waitsia gas field discovered by AWE Limited in 2014. Warrego joined the ASX in March via a reverse takeover of Petrel Energy.
Twelve months earlier, Warrego secured a two-for-one farm-out with Strike Energy (ASX: STX) in a fantastic deal for shareholders allowing them retain a material equity exposure in the block (50 per cent) whilst benefitting from a full carry on the first $11 million of well costs.
The first well to be drilled under the JV, West Erregulla -2, is due to spud this month.
Warrego shares have been trading around the $0.10 mark, capitalising the company at a touch over $50 million.
But in a report commissioned by Warrego broker Bridge Street Capital, Young, who has more than 30 years’ experience in the resources and financial services sectors, assessed Warrego as being worth $0.63 a share assuming West Erregulla -2 strikes gas as expected.
In reaching this valuation, Young used Strike’s assessed P50 resource size – essentially a mid-case estimate – for West Erregulla of 1,163 billion cubic feet (bcf) of gas. Waitsia comparison bodes well
By way of comparison, Waitsia, which is now the fifth largest onshore gas field in Australia, had 2P reserves of 786 bcf when Japan’s Mitsui paid just over $600 million last year to acquire AWE which owned 50% of Waitsia.
The West Erregulla prospect is 16km from Waitsia and 3D seismic indicates a very strong probability that the structure contains the same formations.
Three previous wells drilled in EP469 encountered shallow oil and gas but drilling was terminated prior to reaching the Wagina, Kingia and High Cliff targets of the planned West Erregulla -2 well.
Strike has estimated the chance of discovering gas and proving a developable resource in the Kingia-High Cliff formation as 69 per cent, which is unusually high for an oil and gas exploration prospect.
While recognising the physically close analogue of Waitsia, Young said he felt a geological probability of success (GPOS) of 20-30% was “more reasonable for near-field exploration in areas with similar plays”.
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Warrego Energy Group CEO & Managing Director Dennis Donald and Executive Director Duncan MacNiven More than just West Erregulla
Incorporating Warrego’s other assets, which include the Tesorillo gas project in Spain and extensive Uruguayan acreage inherited from Petrel, Young arrived at an unrisked valuation of $2.10 a share.
Tesorillo represents another near-term catalyst for the company and, aside from West Erregulla, is the other main contributor to Young’s unrisked valuation.
Drilling of the Tesorillo -1 is well planned for early next year, with AIM-listed Prospex Oil and Gas able to earn up to 49.9 per cent in the project by providing approximately $5.5 million in funding.
The Tesorillo concessions contain the Almarchal conventional gas discovery, which was made in 1956.
Gas flowed to the surface but at a low rate, which Warrego believes was largely due to drilling practices at the time which resulted in reservoir damage.
Like West Erregulla, the size of the prize at Tesorillo is large, with a prospective resource size of 831 bcf (gross P50 estimate).
The permits are also located close to the gas trunkline from Africa to Europe, aiding the prospect of commercialisation.
“A discovery in Tesorillo -1 should create significant value,” Young said.
“However, further appraisal drilling is likely to be required before a development decision can be taken.”
Over the course of his career, Young has worked for the likes of ExxonMobil, WMC Resources/BHP Billiton, Wilson HTM and Ord Minnett.
He established K1 Capital, which provides research and advice to firms in the resources sector, in 2016.
WGO Price at posting:
38.5¢ Sentiment: Buy Disclosure: Held
